Even Though It's Down 20% in the Last Year, I Have High Hopes for This Dividend Stock Over the Next 5 Years

Core Viewpoint - Deere's stock is currently undervalued, having declined 20% over the past year, despite the industrial sector's overall growth of 14% [1] Group 1: Business Overview - Deere operates a complex business model that includes various segments such as production and precision agriculture (45% of sales), construction and forestry (24%), and small agriculture and turf (23%) [2] - The majority of Deere's sales are business-to-business, indicating a focus on commercial clients rather than individual consumers [2] Group 2: Market Dynamics - Deere's performance is influenced by the capital spending cycle, where low interest rates and high commodity prices can lead to increased customer investments, while high borrowing costs can result in delayed purchases [3] - Input costs such as fuel and fertilizer also impact profitability, particularly in the construction segment, which is sensitive to real estate trends [3] Group 3: Innovation and Competitive Advantage - Deere has made strides to reduce business cyclicality through software solutions like the John Deere Operations Center, which enhances customer data management and operational efficiency [4] - Long-term competitive advantages include innovation, a robust global supply chain, and pricing power, which can help Deere differentiate itself from competitors [5] Group 4: Valuation and Shareholder Returns - Deere's current price-to-earnings (P/E) ratio stands at 10.4, indicating a low valuation relative to its earnings growth, with a potential P/E of around 20 even if earnings were to fall by 50% [6] - Over the past decade, Deere has increased its dividend by 145% while reducing its share count by over 20% through buybacks, resulting in a low payout ratio of 16% [6][7] Group 5: Investment Outlook - Deere is positioned as a strong long-term investment due to its industry leadership, capital efficiency, and commitment to shareholder returns through dividends and buybacks [8] - Despite potential short-term earnings declines, the stock presents a compelling buying opportunity for long-term investors [9]